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Limitation of Liability Act

In 1851, the United States Congress enacted the Limitation of Liability Act. The purpose of the act was to promote and encourage the growth of American shipping and the American merchant fleet. Under the terms of the act, if certain factual prerequisites are met, a shipowner can limit its liability for a casualty to the value of the vessel and the freight then pending, if any. Specifically, shipowners are entitled to limit their liability if the negligence or unseaworthy condition which caused the loss occurred without the privity and knowledge of the owner.

For unseaworthiness, the owner is required to use due diligence to ensure that its vessel is seaworthy at the outset of the voyage. The privity and knowledge of the owner has typically been held to include the privity and knowledge of shore-based management. For personal injury and death claims, the knowledge of the master of a seagoing vessel at or prior to the commencement of a voyage is deemed to be the knowledge of the owner.

Under the act, any commercial shipowner may claim limitation of liability. Owners of pleasure vessels may be entitled to limitation of liability; however, pleasure craft are excluded from certain parts of the act. The act applies to foreign as well as American shipowners. Also, under certain circumstances, charterers may seek limitation of liability, provided they "man, victual and supply" the vessel.

Often, the shipowner's underwriters are able to benefit directly from the act, provided the policy in effect contains the language necessary to extend the benefits of the act to them. While there are no "magic words," to claim the benefit of limitation the policy must specify that, where the insured is entitled to limit its liability, the insurer's liability shall not exceed that limited liability.

Some marine casualties, such as a collision involving extensive damage to both vessels and a large number of personal are ripe for limitation actions. The Federal Rules of Civil Procedure provide for an injunction against the prosecution of any other actions against the shipowner arising out of the casualty, once the owner has filed a limitation complaint and furnished security. This can be a tremendous benefit to shipowners and their underwriters, as the defense can proceed in one forum, and on one schedule. The savings in defense costs alone often justify seeking limitation in a multiple claimant casualty. Of course, the claimants to a limitation proceeding may, and, frequently do, file motions to lift the limitation stay, so their claims may be pursued in state court prior to the actual determination of the petitioner's right to exoneration from or limitation of liability.

In cases where there are multiple claimants and an insufficient fund, the courts currently allow the automatic stay to be lifted only if every claimant makes the following stipulations:

  1. All claimants must stipulate that the federal court retains exclusive jurisdiction to determine all issues related to the shipowner's right to exoneration from or limitation of liability and all claimants must waive any claim of res judicata relative to the issue of exoneration from or limitation of liability;
  2. All claimants must stipulate that no judgment will be asserted against the shipowner to the extent it exceeds the value of the limitation fund; and
  3. All claimants must stipulate the priority in which their claims will be paid from the limitation fund

The procedures for filing a limitation action are contained in Rule F of the Federal Rules of Civil Procedure, Supplemental Rules for Certain Admiralty and Maritime Claims. Rule F also contains venue provisions which govern in which court the action may be commenced.

The limitation action must be commenced within six months of the date on which the shipowner receives written notice of a claim arising out of the incident. This period is jurisdictional, and the action will be dismissed if it is not filed timely. In addition to filing a limitation action, a shipowner can plead limitation of liability under the act as an affirmative defense to a suit brought in a federal district court. But if the claimant chooses to file its suit in state court, rather than in the federal system, the limitation defense is not available.

Limitation of Shipowners Liability Act: 46 U.S.C. Sec. 181-89